Greener Pastures

Reprinted from Morningstar Advisor Undiscovered Manager August/September 2013

Greener Pastures

By Rob Wherry Dale Harvey left the burdens of managing $20 billion for Capital Group to form his own boutique inspired by Thomas Jefferson.

Dale Harvey didn’t like being popular. In the Most managers wouldn’t mind having such a “I had to put the money to work. I was managing mid-2000s, Harvey found himself managing $20 problem. But Harvey considered it a burden. $20 billion, but I didn’t have $20 billion billion in mutual fund assets for Capital [worth of] good ideas,” he says. “I would buy Group, the parent firm of American Funds. For starters, he often couldn’t build full all the shares I was allowed to buy, and it was Harvey had built up solid records running positions in the out-of-favor companies he just a half position.” diversified sleeves of several team-managed preferred without tripping over restrictions on funds such as Washington Mutual AWSHX, how many of the outstanding shares he To Harvey, it became clear there was just one SMALLCAP World SMCWX, and American could buy. Investing millions of dollars at a solution: leave the firm he had called home Balanced ABALX. His work hadn’t gone time, he also ran the risk of artificially popping for 16 years. What he was contemplating was a unnoticed by investors and his colleagues. Each stock prices. Most concerning to Harvey, drastic step, both on a personal level and morning, it seemed, he came into the office though, was the idea of buying stocks he didn’t from the perspective of his employer. Manager to find that the lead manager on the funds had have high conviction in. turnover is low at Capital Group, which is earmarked more inflows for him to invest. reflected in the fact that 91% of its almost $1

©2013 Morningstar, Inc. All Rights Reserved. Morningstar, the Morningstar logo, and Morningstar Advisor are either trademarks or service marks of Morningstar, Inc. It was the same thing with tech stocks in the 1990s. There were a couple of years there when I looked like a chump. I was early then, but I was correct.

Dale Harvey

trillion in retail mutual fund assets are run by all firms that fit such a description. Like the of the portfolio for riskier plays such as firms managers with tenures greater than 15 years. managers behind those firms, Harvey was going through reorganizations or stocks attracted to the idea that he could pick stocks down the market-cap spectrum. These holdings “It’s like being a professor,” says Harvey of his without anybody looking over his shoulder. are usually kept to small position sizes to former employer. “Nobody ever leaves.” minimize risk. The firm he built and the fund that followed Always a contrarian, Harvey gained inspiration in 2010 were in many ways significant The emphasis on bottom-up research and for taking such a leap from a somewhat odd departures from his time at Capital Group. For Harvey’s contrarian bent are apparent from the source: Thomas Jefferson. Growing up in one, Harvey decided against using a team- resulting portfolio. As of March 31, the Virginia, he knew well the story of Jefferson managed approach and hired just four fund had no exposure to materials, utilities, and Monticello, the plantation that served analysts. Poplar Forest Partners PFPFX is a REITs, and telecommunication stocks, which as the third president’s home for most of his concentrated portfolio of 25 to 35 stocks built account for 12% of the S&P 500 Index. life. Harvey, though, found himself reminiscing without regard to the market cap or the Technology stocks, a growth-fund staple, about Jefferson’s lesser-known estate, sector weightings of the S&P 500. At Capital he soaked up a large 25% of assets versus 10% a retreat 100 miles away called Poplar Forest ran diversified sleeves of funds that had more for the average large-value peer. In addition, that Jefferson used to escape the crowds than three times the holdings. the fund’s top 10 positions held 43% of assets at Monticello. compared with 26% for peers. “I had 80 investments, but I only wanted 30,” The parallels were obvious to Harvey—his new he says. Patience Leads to Results firm would be his version of Poplar Forest, Poplar Forest Capital could have failed as with him and a small team of analysts running Harvey, though, didn’t alter his value-investing quickly as it opened. At the time, Harvey was money far from the glare of the spotlight. strategy, which was partly formed from his managing a $40 million private account To carry the analogy further, Harvey would be admiration for John Neff, the legendary that held his own money and cash from a few free to invest in a portfolio of stocks that Wellington manager who ran Vanguard outside investors that included his ex-col- were largely off the beaten path. The kicker: Windsor VWNDX for 31 years. Harvey favors leagues and friends from his Harvard Business Poplar Forest would make a great name for the attractively priced mid- and large-cap School days. He made a prescient call to new firm. stocks that are underperforming because of mostly avoid financials, which helped him stem what he considers short-term execution losses in the account its first year in existence. Breaking Away problems. To avoid value traps, candidates Poplar Forest Capital opened its doors in must have strong balance sheets, sustainable The mutual fund also ran the risk of flaming out October 2007, just as the economic downturn free cash flows and a history of paying early on. Harvey got off to a so-so start was starting to take hold. While the timing dividends. in 2010, posting a 15% gain that slightly trailed could have been better, the firm wasn’t the S&P 500. While picks in the consumer entering unchartered territory. The mutual fund Ultimately, he wants to own firms that can discretionary and tech sectors such as Time world is filled with examples of managers generate a 15% annualized total return over a Warner TWC and TE Connectivity TEL led who have broken off of large fund companies in three-year period. A catalyst can often the way that year, the gains from those stocks order to start their own firms. DoubleLine, help spur that growth. While most candidates were partly offset by health-care names Marsico, Wintergreen, Yacktman, and IVA are fit that bill, Harvey does reserve a small portion such as Baxter International BAX, whose shares

That was the case this time around, too. Building a Legacy Dale Harvey Harvey’s conviction in his stock selection is Poplar Forest Partners has gained an annual- apparent in the fund’s low 29% turnover rate, ized 14.8% since its inception in 2010, which is one third the peer group average. which represents a two-percentage-point Indeed, he mostly held the financials that were margin of victory over its average large-value laggards in 2011 and watched them rebound peer. That record has slowly gotten it some the next year. The fund’s 17% return in 2012 attention from investors. Poplar Forest Partners PFPFX landed in the top quartile of the peer group. 16000 $16K “We couldn’t get behind a startup,” says S&P 500 TR (IA Extended) (Index) The fund’s strong performance has continued Michael Hatch, a financial advisor with Sterling into 2013, driven largely by its overweight to Group in Pasadena, Calif., who looked at 12000 12 tech stocks and in particular Hewlett-Packard investing in the fund early on but waited a few HPQ, which at 5% of assets is the fund’s years before doing so. “We needed to make largest position. sure the firm gelled.” 8000 01/ 01/ 01/ 01/ 10 11 12 13 Harvey originally bought HP at around $24 a Not everyone is ready to jump in, though. Jan-10 Jan-11 Jan-12 Jan-13 Category Expense Ratio (%) share in 2011 as the stock dipped in the wake “When you are at a big firm like American Funds, Jan-10Feb-10MarAprMay-1-10Jun-10-10Jul-10Aug-100Sep-10Oct-10Nov-1Dec-1Jan-11Feb-110Mar0AprMay-11-11Jun-11-11Jul-11Aug-1Sep-11Oct-11Nov-11Dec-11Jan-1Feb-121MarApr2May-12-12Jun-1-12Jul-1Aug-12Sep-122Oct-122Nov-12Dec-12Jan-1Feb-13MarApr3May-13-13Jun-1-13Jul-133 Large Value 1.25 of the Autonomy merger. This was before there is a lot that helps you,” says Anton beleaguered chief executive officer Leo Bayer, founder of wealth management firm Up Morningstar Rating 3-Yr Annl Total Rtn (%) QQ 18.96 Apotheker was fired and replaced by Meg Capital Management in Granite Bay, Calif. Whitman, the former CEO of eBay EBAY. From Bayer has researched the fund, but has yet to Minimum Investment 3-Yr Total Rtn % Rank Cat Harvey’s perspective, the cheap share price invest. “It is helpful to know [Dale] came from a $25,000 13 meant investors weren’t even assigning successful career. But I was hesitant about a value to the firm’s printer and computer being an early investor.” Data as of June 30, 2013 business. He largely stuck by the underwater position, trimming it briefly in 2012 in order to While Harvey is happy to have investors, he offset capital gains in the portfolio. But he isn’t interested in running as much money dropped 30% on a product recall and a slump jumped back in earlier this year in time to catch as he did at American Funds. Indeed, he says in profits. an upswing in the shares propelled by decent the strategy’s optimal size is $5 billion to second quarter earnings and a rosy outlook for $7 billion, including the fund and other The next year, Harvey built a 25% exposure to the rest of the year. accounts. He also says he isn’t interested at financial-services firms such as Bank of the moment in launching additional funds that America BAC and Citigroup C. But those shares “Once Meg was in place, all the pieces were could attract assets. tumbled in 2011 as investors ditched financials in place,” he says. “The board has learned amid the sovereign debt crisis in Europe its lesson.” “I always want to be a boutique,” he says. More and the debt ceiling debate in the United importantly, he wants Poplar Forest Partners to States. The fund’s 4.8% loss that year trailed Harvey hasn’t gotten all his picks right, though. endure in much the same way Jefferson’s the average peer by four percentage points. The fund’s biggest detractor this year through legacy has. “He focused on creating institu- Such a lackluster showing could have sounded June 11 was cruise ship line Carnival CCL, tions that were long-lasting.” K the death knell for a young fund, but investors whose shares have stumbled in the wake of a didn’t head for the exits. major wreck and several onboard, high-profile Rob Wherry is the associate editor of Morningstar mishaps. The fund still owns the shares, Advisor magazine. “We were straightforward and explained but Harvey has cut the position. [the performance] to shareholders,” he says. “It was the same thing with tech stocks “Senior management hasn’t responded to the in the 1990s. There were a couple of years incidents well. They were like the Keystone there when I looked like a chump. I was early Cops,” he says. “Did they run their costs too then, but I was correct.” thin? It’s hard to answer that.”

The fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The summary and statutory prospectuses contain this and other important information and can be obtained by calling (626) 304-6000 or by visiting www.poplarforestfunds.com. Read carefully before investing.

Mutual fund investing involves risk. Principal loss is possible. The fund may invest in debt securities which typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. The fund invests in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods.

Poplar Forest Partners Fund Average Annual Total Returns % as of September 30, 2018

3Q Since 2018 1 Year 3 Years 5 Years Inception Poplar Forest Partners Fund: (12/31/09) I Shares 6.26 8.72 13.68 9.57 11.93 A Shares No Load 6.17 8.45 13.39 9.30 11.65 A Shares With Load 0.86 3.02 11.47 8.18 10.99 S&P 500 Index 7.71 17.91 17.31 13.95 13.96 Morningstar Large Value 5.49 10.84 13.45 10.19 NA Category

Expense Ratio A Shares: 1.28% Gross; 1.25% Net of fee waiver Expense Ratio Institutional Shares: 1.03% Gross; 1.00% Net of fee waiver The net expense ratio is applicable to investors.

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling 877-522-8860. Investment performance reflects fee waivers. In the absence of such waivers, total returns would be reduced. Performance data shown for Class A with Maximum Sales Charge reflects the Class A maximum sales charge of 5.00%. Performance data shown for Class A without Sales Charge does not reflect the deduction of the sales load. If reflected, the load would reduce the performance. *The Adviser has contractually agreed to waive a portion or all of its management fees and/or pay Fund expenses (excluding acquired fund fees and expenses, interest, taxes and extraordinary expenses) in order to limit the Net Annual Fund Operating Expenses to 1.25% and 1.00% of average daily net assets of the Fund’s Class A shares and Institutional Class shares, respectively until April 6, 2018.

As of September 30, 2018, the Poplar Forest Partners Fund’s 10 largest holdings accounted for 43.32% of total fund assets. The Fund’s 10 largest holdings at September 30, 2018 were:

Qualcomm 4.80% AmerisourceBergen 4.61% Advance Auto Parts 4.49% Citigroup 4.35% Bank of America 4.26% MSC Industrial Direct 4.23% Abbott Laboratories 4.21% Lincoln National 4.20% International Business Machines 4.13% Zimmer Biomet Holdings 4.03%

Fund holdings and sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Free cash flow is revenue less operating expenses including interest expenses and maintenance capital spending. It is the discretionary cash that a company has after all expenses and is available for purposes such as dividend payments, investing back into the business or share repurchases.

The S&P 500 Index is a market-value weighted index consisting of 500 stocks chosen for market size, liquidity, and industry group representation. It is not possible to invest directly in an index.

The Morningstar Large Value Category Average includes funds with similar investment objectives.

References to other mutual funds should not be considered an offer of those securities.

The Growth of $10,000 chart illustrates the performance of a hypothetical $10,000 investment made in the Fund since its inception on 12/31/09. It assumes reinvestment of dividends and capital gains, but does not reflect the effect of any applicable sales charge or redemption fees. This chart does not imply any future performance.

The Poplar Forest Partners Fund is distributed by Quasar Distributors, LLC.